Three ways to hold a peg
- Fiat-backed: every token is matched by dollars or short-term treasuries in a bank. USDT and USDC work this way. Simple and dependent on the issuer being honest and solvent.
- Crypto-backed: overcollateralised with volatile crypto, so $150 of ETH might back $100 of stablecoin. Transparent on-chain, but exposed to sharp drawdowns.
- Algorithmic: maintains the peg through supply mechanics rather than reserves. This design has failed catastrophically before and warrants extreme caution.
What a depeg actually is
A stablecoin trades at whatever the market will pay, not at the value it claims. When confidence in the backing falters, the price slips below $1 and the gap widens as holders rush to exit. Recoveries happen — but the ones that did not recover took the entire balance with them.
A fiat-backed stablecoin briefly traded near $0.88 in 2023 when part of its reserves sat at a failing bank. It recovered within days, but holders who needed liquidity during the window realised the loss.
What to check before trusting one
- Are reserves attested by an independent auditor, and how often?
- What is actually in the reserves — cash and treasuries, or commercial paper and loans?
- How deep is redemption liquidity, and who is allowed to redeem directly?
- Which jurisdiction and regulatory regime does the issuer operate under?
What they are used for
Stablecoins are the settlement layer of crypto trading: quoting pairs, moving value between exchanges in minutes, parking funds between positions, and earning yield in lending markets. They are also increasingly used for cross-border payments where traditional rails are slow or expensive.